In the last post I sketched out a hypothetical situation to see how I would benefit from applying all but $1000 of my “interim” Emergency Fund to a student loan I am aggressively paying down, and what I would lose if an emergency in the same amount as my original emergency fund ($5400) came along. As it turns out, I would gain $105 from applying the extra cash to the loan. But I would lose $15 over the interest savings and everything else if an emergency were to happen that would cause me to go into $4400 of credit debt.
It was interesting to investigate, but the thought of gaining $105 saved in interest or losing $15 hypothetically does not drive my saving habits. What really drives my habits is disgust with the possibility of going back into credit debt, and the desire to get all loans paid asap and in a satisfying manner, if possible. So the need to do both of these has left me wondering what the “magical interim” number is for emergency fund. But then I realized it does not have to be a static number for my whole (accelerated) loan paydown period. I have settled on a sort of “emergency fund with a side of snowball loan paydown” approach to saving.
I like the idea of really blasting loans with awe-inspiring lump sums, but that is hard to do with huge loans. However, I also have small loans (with lower interest rates, otherwise they’d be gone already). I started thinking I could use my emergency fund as a side-snowball fund. Pay down a small loan in full once the EmFund achieves some critical mass to withstand the loss. Repeat.
How did I come to have a random amount of savings such as $5400? At one point I had a sizzling, juicy, nearly-8-month EmFund of $14k, which I felt I wanted before getting down to business tackling all of my student loans.
Then last November I decided to take $11.5k of that and pay off my car. I could have taken the $11.5k, or all $14k, and applied it to the student loan I was blasting at the time, which was at $15k. But emptying my EmFund entirely and having yet $1k to pay on the targeted student loan did not seem satisfying or fitting. However, the car loan could be utterly blasted with a respectable $2.5k left over. Looking back, I cannot imagine having to make a car payment on top of my other loans. It is liberating.
And in 5 short months, EmFund has grown from $2500 to $5400. With zero effort from me, other than not spending it! My plan has been to throw all earned money into loans, and save all “found” money (tax returns, bonuses, gas reimbursements) into EmFund. I am now blasting a $14k loan with my earnings, but I have my eye on my smallest remaining loan @ $7k… the next EmFund snowball victim!
And the nice thing about using the EmFund as a rolling paydown tool is that you are willing to take more risks as you become more debt-free. Since I made that first move in November, I have $26,500 less debt, and have freed up $580 in monthly costs from previous loans that I can now use on other loans. So now I may justify pulling the trigger sooner on the $7k loan. And it would be worth it.
I do not like the idea of snowball loan paydown generally, because it does not pay off with interest. But I think this side-snowball approach complements a larger “highest interest rate first” loan paydown plan nicely. One day soon I will be able to blog that I paid down a $7000 loan in full. Like a boss!